As XaaS/recurring revenue models have matured over the last 10-15 years, companies continue to shift their licensing and pricing dynamics in response to changing customer preferences. Alexander Group predicts that in 2022, most tech companies will integrate consumption-based pricing as part of their overall go-to-market strategies, driven by changing buyer preferences and the rise of Product Led Growth (PLG), and innovative technologies. Furthermore, Alexander Group predicts that IaaS adoption and on-premise migration to the cloud will accelerate rapidly in 2022 as legacy hardware and software companies modernize.
Today, about 20-30% of companies are deploying some form of a consumption pricing model, and Alexander Group predicts that nearly 50% of tech companies will deploy some form of consumption pricing by the end of 2022. The consumption model will not replace existing subscription license models entirely. Rather, it will supplement subscription pricing across portfolios.
Alexander Group also predicts that 2022 will be the year that Infrastructure as a Service (IaaS) adoption will accelerate at a rapid pace. For example, buyers have seen the benefits of as-a-service in the software model and are demanding the same with hardware, which in turn also aligns all IT buying processes. In response, major hardware manufacturers are selling equipment “as-a-service,” whether as a subscription or consumption-based pricing model.
As buying preferences shift towards subscription/consumption and away from capital expenditure, Alexander Group predicts that on-premise migration to cloud will accelerate rapidly in 2022. Some leading factors for this include the notion that companies expect to accelerate Annual Recurring Revenue (ARR) growth to appease investors, and that privacy and security issues have been largely addressed and overcome in the cloud environment. Furthermore, the trend is clear: over the past 4+ years, Alexander Group has seen that the share of hybrid companies’ businesses dedicated to XaaS has increased substantially every year. On average, hybrids have now passed the “threshold,” meaning a majority of hybrid companies are now 50% or more XaaS.
Davis Giedt: Welcome everyone to our series on predictions for the tech market for 2022. I’m Davis Giedt, leader of our analytics and research practice here at Alexander Group. With me today, Ted Grossman, principal and leader of our technology practice, as well as Rachel Parrinello, Principal Technology Research Fellow and leader of our compensation practice across the firm. Today, we’re talking about licensing and pricing, which is one of our several predictions for 2022, and sort of at a high level our prediction around this topic is that all companies will integrate consumption-based pricing as part of their overall go-to-market strategies in 2022. This will be driven in large part by changing preferences and the rise of product-led growth, as well as the rise of innovative technologies within the space. So the first thing is we’re going to be talking about is sort of this notion that pure consumption models will continue to rise in popularity in 2022, and Rachel’s been doing some research on that topic and is going to tell us a little bit about her thoughts in terms of how that’s going to play out in 2022.
Rachel Parrinello: Yeah, thank you very much, Davis. So the AWS, you know, uses this model, a consumption model, and lots of other companies and now have adopted that model. So we’ve got a lot of pure-play companies like the Snowflakes and Databricks of the world who’ve come about and they’ve come to market with a pure consumption model, and it’s definitely gaining in popularity. One thing that’s nice about the consumption model, and a lot of customers like about it, is if they only pay for what they use. Fintech is another sub-industry sector that has constantly been using consumption models. One reason behind that is they do have a revenue share model, so consumption makes sense for those revenue share partnerships that the fintech industry has been in. So what’s our prediction? Our prediction is that, you know today there’s 20 to 30% of XaaS companies have consumption models, and we think it’s going to grow and we think it’s going to grow exponentially. So we’ll see probably nearing half of companies 50% will have consumption models.
Davis Giedt: That’s great. So tell us a little bit about how you think consumption models will impact overall subscription pricing. Is it going to be a supplement? Is it going to take over subscription pricing? What’s your prediction based on what you’ve seen?
Rachel Parrinello: Yeah, well, when you look at the hybrid companies or even the pure-play subscription companies, the XaaS companies, a lot of them are adding consumption pricing models to their portfolio. So we don’t think it’s going to replace subscription pricing models or one-time kind of hardware purchases, but it will be supplementary. The interesting thing here that we’ve seen and we’ll predict will increase as well as a lot of hardware companies are getting into this, into this business with basically selling their hardware as a subscription. And that leads really nicely into, I think, Ted’s topic, which is talking about the infrastructure-as-a-service sector.
Davis Giedt: Yeah. So Ted, tell us a little bit about infrastructure as a service and your thoughts on where it’s going to go in 2022.
Ted Grossman: Yeah. So this is really, think of hardware or core networking, and instead of purchasing, you know, capital equipment, you’re actually buying it as a service that you use. And you know, this has been on the sidelines while XaaS has taken off over the last 10 to 15 years, but starting probably two or three years ago, if you look at the major hardware manufacturers out there who sell into tech, they’ve all started creating these kinds of models and they certainly have been partnering with managed service providers for a while. With the goal of driving recurring revenue being strong, these companies are trying to, you know, these are lower profit margin companies that they’re trying to find ways to increase their valuation and recurring revenue is something that’s on the top of, I think every board member and every leader for these companies. So, what we’re going to see is IaaS, I-a-a-S, really this will, I think 2022 is going to be the year where we’re going to start seeing it being companies dabbling in this to really doubling down and trying to get to 10, 20 or 30% of their revenue potentially coming in and it’s smart. It’s really the I think this is the year of the launchpad. It’s not going to end here, but this is the year where it’s really we’re going to see much heavier efforts.
Davis Giedt: That’s great, so, Ted, tell us a little bit also about migrating from on-premise to the cloud and sort of how you think that’s going to play out in 2022.
Ted Grossman: Yeah. So I mean, this kind of gets back to sort of traditional software companies, what we call hybrid companies where they still sell perpetual licenses, as well as maybe they’re now selling subscription or consumption-oriented models. You know, there’s always going to be probably some use-cases in every company where there’ll be customers who want to buy a perpetual license. But both because a lot of applications are moving to the cloud and, two, there’s a buyer preference towards having subscription or usage-based pricing versus, you know, purchasing it all upfront as capital equipment. And thirdly, the the the root cause of just, you know, companies wanting to have recurring revenue streams. This will be the year that I think the hybrid companies are going to go from like, smaller percentage of their business and subscription to really trying to convert and migrate all their old customers over and why when I say all their customers, maybe 90% or 80%. So we’re going to start seeing programs, maybe it’s going to show up in compensation, it’s going to show up in different kinds of promotions where companies are going to say move your business over to a subscription with us and we’re going to offer you incentives and things along those lines to do that. And I think we’re going to see a big uptick in that this year.
Davis Giedt: Yeah, one interesting piece on that is we tend to see the percentage of bookings or business within hybrid companies, that is XaaS, so so the percentage of their business that is XaaS, that continues to go up and up every time we do research every year and it’s recently on average, it’s passed the threshold, meaning they’re becoming closer to being either pure-play companies in their own right or, you know, a good mix of recurring revenue and perpetual license.
Ted Grossman: Yeah, absolutely, I mean, it’s been borne out in the trend at some point you really try to make that push to get the final group that you can’t over. And I think that’s what we’re going to start seeing this year.
Davis Giedt: Fantastic. Ok. Well, thanks Rachel and Ted for your comments on that, that topic. I think that’s all we have for today. Thanks, everyone. See you on the next video.